Employment status: Director and 40% shareholder was not an employee or worker

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Employment status: Director and 40% shareholder was not an employee or worker

Published 13 enero 2022

The EAT has upheld a tribunal’s decision that a director who was also a 40% shareholder and received payments described as “salary” was neither an employee nor a worker.

THE FACTS

Bradley Rainford and his brother were shareholders and co-directors of Dorset Aquatics Ltd. Bradley held 40% of the shares, and his brother owned 60%. Bradley worked predominantly as site manager at a company site. There was no express contract, written or oral nor other record relating to Bradley’s employment status. 

The brothers were each paid an equal “salary” agreed between them, and had PAYE and National Insurance Contributions deducted from this salary. This was done on the advice of company accountants, without input from either brother. The brothers also agreed between them the amount of dividends to be paid at the end of the year.

A dispute arose between the two brothers which resulted in Bradley bringing claims in the employment tribunal for unfair dismissal, notice pay, unlawful deductions and holiday pay.  His employment status needed to be decided as a preliminary issue. The employment tribunal held, that Bradley was neither a worker nor an employee.  The EAT rejected his appeal.

The following points were key to the EAT and tribunal judgments.

  • There was a clear difference in status between the brothers and the other company employees.
  • There was no mutuality of obligation beyond an expectation that both brothers would generate and execute enough work to sustain the company and its profits so that their employees and their own salary could be paid.
  • Bradley set his own hours and holidays.
  • It was Bradley’s own choice to perform the tasks that he performed.
  • Both brothers were free to work elsewhere, and Bradley also worked with his partner in her hair salon.
  • The tribunal accepted evidence that Bradley could have substituted someone else to perform his work, though this never actually happened. There was therefore no obligation of personal service.
  • The “salaries” were fixed by both of them from time to time based on what the company could afford. This was paid regardless of how many hours they worked.
  • The tax treatment of the “salaries” was on the advice of an accountant, without input from the brothers.
  • There is no reason in principle why someone who is a shareholder and director of a company cannot also be an employee. However, working director-shareholders need not necessarily be working under employment contracts.
  • The level of Bradley’s control over the company and the fact that he shared the risk in the company’s success with his brother were referable to his status as a director/shareholder and not directly relevant to the question of whether he was an employee or worker: they formed part of the backdrop but had no significant influence on the decision.

WHAT DOES THIS MEAN FOR EMPLOYERS?

It is clear, from this case, that the fact that someone is a working director and shareholder is not determinative of employment status: the employment status of such an individual will depend on the specific facts.

Rainford v Dorset Aquatics Ltd

Authors

Hilary Larter

Hilary Larter

Leeds

+44 (0)113 251 4710

Zoë Wigan

Zoë Wigan

London - Walbrook

+44 (0)20 7894 6564

Ceri Fuller

Ceri Fuller

London - Walbrook

+44 (0)20 7894 6583

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